Poland needs to consolidate its public finances to ensure it retains its single-A rating, rating agency Fitch warned, saying it’s concerned about recent public finance trends in Poland. Things may get worse next year as the Polish government is betting on continued economic growth rather than austerity measures and is mulling creative accounting to show better debt figures.

“Poland needs to narrow its budget deficit over the next few years to stem the rise in the gross debt ratio and prevent negative pressure building on its sovereign creditworthiness,” says Fitch’s David Heslam, a director in the sovereign ratings team. “Tolerance for further material slippage from official deficit targets is limited at the current rating level.”

The Polish government originally expected a deficit this year equivalent to 6.9% of gross domestic product. In October, it revised the figure to 7.9%. That revision, Fitch said, further weakened the credibility of Poland’s fiscal forecasts.

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Forecasts were already off the mark when Poland’s Finance Minister Jan Vincent-Rostowski said last year the 2010 deficit would be at 52.2 billion zlotys ($17.4 billion) this year, much higher than in previous years. The government was sending signals during the year the actual figure could be below PLN40 billion. It now looks to come in somewhere in the middle.

But thanks to initially projecting a jump in the deficit, Mr. Rostowski was able to win more wiggle room in planning the deficit for 2011, the year of parliamentary elections. Poland’s self-imposed debt rules force the government to plan a lower deficit-to-revenue ratio if debt-to-GDP exceeds 50%. The government knew that was inevitable in 2010, but a high deficit projected for this year takes the edge off the legal limits for 2011. Mr. Rostowski Thursday downplayed Fitch’s warning and reiterated the Polish government is already consolidating its finances. The Polish government earlier this year proposed a cap on discretionary spending at 1 percentage points above inflation. Most of Poland’s budget spending is non-discretionary though, with spending growth stoppable only through complicated legislative campaigns that would likely estrange vital groups of voters.

The government, in fiscal forecasts already revised once this year, expects to bring the deficit under 3% of gross domestic product in 2013. The European Commission wants the deficit at that level by 2012, which was the deadline Poland originally promised before realizing it wasn’t as realistic as initially thought.

On Wednesday, the government began testing the concept of sweeping some of its debt under the rug to play the system of domestic thresholds once more. Senior officials said the government may issue a new type of bond to private pension funds to allow the country to show lower debt levels and reduce its borrowing needs because the instrument will be excluded from domestic debt calculations.

The Polish government, through state-owned bank BGK, in 2009 started issuing ‘road bonds’ to formally observe self-imposed debt limits. But the ‘road bonds’ are tradable and issued at market terms. The ‘pension bonds’ wouldn’t be tradable, their yields wouldn’t be set by the market, and consequently they would be nothing else but IOU notes, redeemable in several decades—or not, if the government defaults.

“This means that getting market returns on the bond would probably not be possible,” said Tomasz Bankowski, head of the Pekao Pioneer PTE pension fund.

Pension funds now get real money, collected by the state administration from taxpayers. They are obliged to invest a certain percentage of that cash in government bonds—tradable, issued at market yields. The government plan is to keep real cash and give junk paper in its stead. This would help it observe the debt-to-GDP limits in the Polish public finance law and allow the government to avoid imposing serious austerity measures, at least in the short run.

“We feel responsible for the people and the Poles who live here and now, and not in a distance future,” Poland’s Prime Minister Donald Tusk said in August. Some of those people will, however, live in, say, thirty years from now when the IOUs mature.

Comments (5 of 8)

(I tried to post this comment the other day only to fail. The server would not accept it somehow. I am now trying again.)

Although the central bank governor Marek Belka says something different, I regard the zloty, apparently converging into the region of 0.25 euro, as a bit too overvalued these days - theoretically. Considering the long-term trend of Poland’s current account, I think the currency needs to be cheaper, ideally by 20 per cent as long as I refer to the NBP’s statistics, to enter into the ERM2.

It does not mean that I disagree with Mr Belka: He is only perfectly faithful as a central banker, who is not supposed to use the monetary policy to directly boost his economy’s export industry, which is others’ job.

What Germany did is to fix the mark cheap compared with the then long-term trend of its current account to support its export industry, especially the manufacturing. What China is doing is similar to Germany’s strategy. It is a one-time currency manipulation of an economy to pursue its long-term development at the cost of its short-term purchasing power. If the economy has developed equity capitals faster than its growth, then its development will be correspondingly consolidated.

The strategy would aggravate the international macroeconomic imbalance indeed, but the imbalance would be aggravated in any ways as long as ‘markets are always wrong’. Then, it is better to become a creditor nation than to remain a debtor nation in such a financial jungle. It is a method of machiavellianist pragmatism for an economy to survive.

After all, the ERM2 programme is itself a form of currency manipulation. It is more important not to be gullible then than to argue for or against currency manipulation. See what is happening to the sucker nations like Ireland and Greece. Keep this talk to yourselves, to avoid political troubles.

(to be continued…)

9:11 pm November 30, 2010

Jan wrote:

(I tried to post this comment the other day only to fail somehow. The server would not accept. I am now trying again.)

Although the central bank governor Marek Belka says something different, I regard the zloty, apparently converging into the region of 0.25 euro, as a bit too overvalued these days - theoretically. Considering the long-term trend of Poland’s current account, I think the currency needs to be cheaper, ideally by 20 per cent as long as I refer to the NBP’s statistics, to enter into the ERM2. It does not mean that I disagree with Mr Belka: He is only perfectly faithful as a central banker, who is not supposed to use the monetary policy to directly boost his economy’s export industry, which is others’ job. What Germany did is to fix the mark cheap compared with the then long-term trend of its current account to support its export industry, especially the manufacturing. What China is doing is similar to Germany’s strategy. It is a one-time currency manipulation of an economy to pursue its long-term development at the cost of its short-term purchasing power. If the economy has developed equity capitals faster than its growth, then its development will be consolidated by that much. The strategy aggravates the international macroeconomic imbalance indeed, but the imbalance is aggravated in any way as long as ‘markets are always wrong’. Then, it is better to become a creditor nation than to remain a debtor nation in such a financial jungle. It is a method of machiavellianist pragmatism for an economy to survive. After all, the ERM2 programme is itself a form of currency manipulation. It is more important not to be gullible then than to argue for or against currency manipulation. See what is happening to the sucker nations like Ireland and Greece. Keep this talk to yourselves, to avoid political troubles.

I do not regard that the Polish version of MEFO bills being issued to private pension funds as the type of scheme of ‘sweeping debts under the rug’. As I wrote to Mr Sobczyk’s entry dated Nov 18, 2010 9:33 AM, I would rather criticize the European Commission for the stubbornness that will certainly discourage pension reforms throughout the EU. Poland is not all alone: Sweden stands by Poland on this issue. Hungary, the economy having already been in the soup, has decided to re-nationalise the private pension funds. I assume that, unlike IOU notes or Nazi MEFO bills, Poland’s ‘pension bonds’ scheme is being forged merely as a tentative solution for a relatively short period of time during which Poland and Sweden will probably, or rather certainly, lobby in Brussels to change the regulation while they proceed with the pension reform. If they fail, they may naturally have to re-nationalise all the private pension funds in the long run, and thousands of financial middlemen may lose their jobs and blame Fitch for having put too much heat on them. Rather, I think rating agencies should bring both the European Union and commissioners in charge to a kangaroo court in the first place for virtually blocking the pension reform that some of the member states like Poland and Sweden are struggling for if it really wants to care about investors’ welfare.

5:12 am November 30, 2010

Bartek wrote:

Polish GDP growth has jumped to 4.2% in the 3rd quarter (compared with 3.5% in the 2nd) powered mainly by domestic consumption and investments which is consistent with falling unemployment figures.

10:24 pm November 27, 2010

Jan wrote:

Although the central bank governor Marek Belka says something different, I regard the zloty, apparently converging into the region of 0.25 euro, as a bit too overvalued these days. Considering the long-term trend of Poland’s current account, I think the currency needs to be cheaper, ideally by 20 per cent as long as I refer to the NBP’s statistics, to enter into the ERM2.

It does not mean that I disagree with Mr Belka: He is only perfectly faithful as a central banker, who is not supposed to use the monetary policy to directly boost his economy’s export industry, which is others’ job.

What Germany did is to fix the mark cheap compared with the then long-term trend of its current account to support its export industry, especially the manufacturing. What China is doing is similar to Germany’s strategy. It is a one-time currency manipulation of an economy to pursue its long-term development at the cost of its short-term purchasing power. If the economy has developed equity capitals faster than its growth, then its development will be consolidated by that much. The strategy aggravates the international macroeconomic imbalance indeed, but the imbalance is aggravated in any way as long as ‘markets are always wrong’. Then, it is better to become a creditor nation than to remain a debtor nation in such a financial jungle. It is a method of machiavellianist pragmatism for an economy to survive.

After all, the ERM2 programme is itself a form of currency manipulation. It is more important not to be gullible then than to argue for or against currency manipulation. See what is happening to the sucker nations like Ireland and Greece. Keep this talk to yourselves, to avoid political troubles.

10:23 pm November 27, 2010

Jan wrote:

Although the central bank governor Marek Belka says something different, I regard the zloty, apparently converging into the region of 0.25 euro, as a bit too overvalued these days. Considering the long-term trend of Poland’s current account, I think the currency needs to be cheaper, ideally by 20 per cent as long as I refer to the NBP’s statistics, to enter into the ERM2. It does not mean that I disagree with Mr Belka: He is only perfectly faithful as a central banker, who is not supposed to use the monetary policy to directly boost his economy’s export industry, which is others’ job. What Germany did is to fix the mark cheap compared with the then long-term trend of its current account to support its export industry, especially the manufacturing. What China is doing is similar to Germany’s strategy. It is a one-time currency manipulation of an economy to pursue its long-term development at the cost of its short-term purchasing power. If the economy has developed equity capitals faster than its growth, then its development will be consolidated by that much. The strategy aggravates the international macroeconomic imbalance indeed, but the imbalance is aggravated in any way as long as ‘markets are always wrong’. Then, it is better to become a creditor nation than to remain a debtor nation in such a financial jungle. It is a method of machiavellianist pragmatism for an economy to survive. After all, the ERM2 programme is itself a form of currency manipulation. It is more important not to be gullible then than to argue for or against currency manipulation. See what is happening to the sucker nations like Ireland and Greece. Keep this talk to yourselves, to avoid political troubles.

I do not regard that the MEFO bills being issued to private pension funds as the type of scheme of ‘sweeping debts under the rug’. As I wrote to Mr Sobczyk’s entry dated Nov 18, 2010 9:33 AM, I would rather criticize the European Commission for the stubbornness that will certainly discourage pension reforms throughout the EU. Poland is not all alone: Sweden stands by Poland on this issue. Hungary, the economy having already been in the soup, has decided to re-nationalise the private pension funds. I assume that, unlike IOU notes or Nazi MEFO bills, Poland’s ‘pension bonds’ scheme is being forged merely as a tentative solution for a relatively short period of time during which Poland and Sweden will probably, or rather certainly, lobby in Brussels to change the regulation while they proceed with the pension reform. If they fail, they may naturally have to re-nationalise all the private pension funds in the long run, and thousands of financial middlemen may lose their jobs and blame Fitch for having put too much heat on them. Rather, I think rating agencies should bring both the European Union and commissioners in charge to a kangaroo court in the first place for virtually blocking the pension reform that some of the member states like Poland and Sweden are struggling for if it really wants to care about investors’ welfare.

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